Divorce and the 401(k)

A married individual’s 401(k) is generally split between the spouses in the event of a divorce. As with all marital assets, the amount of the division is meant to be equitable and is based on a variety of factors including the length of the marriage, the contributions each spouse made to the marriage and the way the rest of the marital assets are divided.

A 401(k) is split by means of a Qualified Domestic Relations Order, a court order that names the other spouse as the beneficiary of the assets. The proper creation and validation of the QDRO is essential. If any information is missing or if there is some other problem with the paperwork the division will still generally take place, but the account will be subject to a federal income tax early withdrawal penalty of 10 percent, paid by the original owner of the 401(k).

It is generally in the recipient spouse’s best interest to keep the funds received in another qualified retirement account rather than accepting a cash payment. The money can be rolled into another IRA or even left untouched in the other spouse’s 401(k). The recipient ex-spouse cannot increase the size of the account or withdraw the money from the retirement fund until the other ex-spouse does, in such a situation, but may otherwise exercise complete control over investments.

When considering a divorce, or immediately after having been informed of a spouse’s desire to obtain one, many individuals may consider it in their best interest to consult with a divorce and family law attorney. As the division of retirement accounts can be complex, it is important that the QDRO is prepared properly before submission to the court.

Source: 401k.org, “401(k) and Divorce“, December 24, 2014